The dollar was slightly weaker ahead of the key FOMC rate decision due later today dropping to 112.18 in USDJPY while euro broke above the 1.1400 figure in London trade.

The euro was boosted by news that the European Commission has decided not to pursue excessive debt procedures against Italy with two parties coming to a compromise on the budget.

In other economic news, UK CPI data came in basically in line at 2.3% vs. 2.3% eyed showing that price pressures remain steady in UK economy, but cable ignored the news slipping below 1.2650 as the Brexit impasse continues to dominate trade in the pair.

Overall, however, FX flows are expected to be subdued until the FOMC presser later today with all eyes on Fed Chair Powell. The market anticipates another 25bp rate hike today to take rates to 2.50%, but the focus will be on guidance for 2019 and especially the dot plot which projected 3 more rate hikes next year, but may now slip back to 2.

The recent turbulence in the capital markets is sure to have caught the attention of the Fed, and the market will be keen to hear what Powell has to say. Aside from the slide in equities, the other trouble spot in the US economy is the sharp decline in oil. With crude at $45/bbl most of the frackers are now underwater in their business models and given the combination of falling prices and higher credit costs, the squeeze could prove to be especially harmful to one of the most capital-intensive sectors of the US economy.

If Chairman Powell ignores the weakness in capital markets and a sharp decline in energy costs the greenback may see a knee-jerk pop but then could actually sell off especially against the yen if equity markets take a tumble. On the other hand, if Powell hints at a possibility of rate hike halt as the Fed waits for the US markets to stabilize, the dollar may still sell off but risk on flows in equities should keep the decline in USDJPY contained to the 111.50 level.

Should the Fed turn dovish, the euro could be the biggest beneficiary of the flows with Italian crisis now averted and US rates capped for the near term, the pair could make a run to 1.1500 as the day proceeds.